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The Leased Costs The Most

"In most cases, you'll be money ahead to own rather than lease machinery," says Ron Andresen, sales manager for Marion County Implement, a John Deere dealership at Palmyra, MO. "But there are situations where leasing is the best way to go."

One example, says Andresen, would be a farmer who rents all or most of his land on a fairly short-term basis. If he loses the land but owns the equipment, he could be caught with machinery and no land to use it on.

Less than 25% of the equipment that rolls off Marion County Implement's lot is leased.

"About 10% is leased through a company-sponsored lease, and another 15% or less is leased through commercial lenders," Andresen notes. "And we're doing a good bit of re-leasing, when the lessee opts not to buy the equipment at the end of the lease term."

The use of lease financing is about 20% of total equipment purchased, says Brian Delgado, communications manager for Farm Credit Leasing, Minneapolis.

"Leasing is more flexible - you can set the terms to suit your situation to a great extent," Delgado adds.

"You can set lease terms to pay aggressively. You can get into a true lease with little or no down payment. Or, you can structure a lease to have lower monthly payments than if you took a purchase loan. It all depends on the financial objectives of the individual."

Generally, there are two ways to lease equipment. A capital lease (lease-to-own) is somewhat like a purchase loan. The lessee builds equity in the equipment and usually assumes ownership at the end of the lease term. Most tax accountants (and the Internal Revenue Service) treat this like a purchase. The equipment is shown as an asset and the lease as a liability on the balance sheet. Only interest and depreciation are deductible.

With an operating (true) lease, the lessor retains title to the equipment, but the entire lease payment is deductible in the year the payment is made.

"IRS rules are fuzzy on what distinguishes a true lease from a conditional sale," says Delgado. "Each case is decided on its own facts and circumstances. But leased equipment can generate more tax benefits than owned equipment when the agreement is structured as a true lease."

Leasing can be especially attractive to family farm corporations, says Larry Ward, ag financial services vice president for Farm Credit Services of western Missouri. "You can wind up with a corporation that is asset-rich and principals or shareholders who are asset-poor. Leasing can let individuals get assets out of a corporation without incurring a big tax liability or dissolving the company," he says.

Leases may be used to pass along assets in other ways, too, says Andresen.

"Say an older farmer is thinking of turning over the operation. He leases a $120,000 tractor with an aggressive payout, so that by the end of the lease the residual value of the tractor is at or below what he can legally gift to his heirs. He can pass along a machine that is still worth $90,000 or $100,000, but it only shows up as $30,000 or so on his estate."

Also, a lease can be an off-balance-sheet item that doesn't count against other capital or operating debt, Ward adds.

If you're thinking of leasing, talk with a tax planner first to avoid surprises at tax time.